Changes in the insurance and reinsurance sector

Author: Christopher Anderson, Bedell Cristin, Guernsey

Since the last publication of this guide there have been a number of changes to Guernsey's laws affecting the insurance and reinsurance sector:

• following the success of the protected cell company, a new breed of company, the incorporated cell company (ICC), has been created; and
• a new Companies Law is to be introduced next year.

In addition, Guernsey, and Bedell Cristin specifically, continue to attract alternative risk transfer business both in the general and the life sectors.

The Guernsey protected cell company (PCC) has been around for almost 15 years – Guernsey was the first jurisdiction in the world to introduce such legislation. A protected cell company comprises a core of assets and any number of cells. A protected cell company differs from an ordinary company because when it contracts it can limit its liability under the contract to a specified pool of assets – being the core or any designated cell.

The ICC follows the same principle as the PCC, comprising the incorporated cell company itself and any number of incorporated cells. Like a PCC, the liability of an ICC under a contract can be referable to the ICC itself or to any one of its incorporated cells. The significant difference between the two is that each cell of an ICC is a separately registered legal entity whereas a PCC is a single legal entity. Unlike the cells of a PCC, each incorporated cell has a separate board, its own share capital, its own memorandum and articles of association and produces its own accounts. Whereas the board of a PCC enters into contracts on behalf of the PCC in respect of each of its cells, it is the board of the relevant incorporated cell of an ICC which enters into contracts in respect of the incorporated cell.

As a consequence of the separate legal personality of each incorporated cell:

• a company can be converted into an incorporated cell of an ICC and vice versa. Therefore, an incorporated cell of an ICC can be sold off to a third party;
• like a standalone company an incorporated cell can amalgamate with other companies or incorporated cells and migrate to other jurisdictions.

These things are not possible with a PCC. However, despite the advantages of ICCs, no-one is yet predicting the demise of the PCC. Because they are not separately registered, cells of a PCC can be formed quickly by board resolution and the administrative costs of a PCC are lower than those of an ICC. In addition, the PCC can enjoy tax benefits because it is treated as a single legal entity for taxation purposes whereas each incorporated cell of an ICC is looked at separately.

Outline proposals for reform of Guernsey company laws were approved by the Guernsey parliament in July 2007 and it is expected that draft legislation will be brought into force next year. Those changes are worthy of an entire article in their own right but at this stage it is worth highlighting the following key points:

• Restrictions on the payment of dividends and redemption and repurchase of shares will be lifted. Instead, companies will be able to deal with their capital and other assets and make distributions as the directors see fit, subject to the company satisfying a solvency test.
• The court will no longer be required to approve the formation, change of name or reduction of share capital of a Guernsey company. Instead shareholder and, in some cases, regulatory approval will suffice. Although the requirement to obtain court approval in respect of these matters has seldom caused any difficulties in the past, their removal can only speed up and ease that process further.

Recent business

Guernsey continues to attract alternative risk transfer transactions. Bedell Cristin regularly advises on insurance transformer transactions whereby a derivative financial instrument, often a credit default swap (CDS), is written by the cell of a PCC. The cell's liability under the CDS is then insured by a traditional insurer. In this way, the insurer is able to gain exposure to other types of financial instruments while retaining the benefits of doing so through its traditional insurance business.

These instruments are attractive to insurers because they represent non-correlated risk, differing markedly from the other risks on the insurer's balance sheet. In the same way, finance houses have a keen appetite for the non-correlated risk offered by the traditional insurance market. For example, Bedell Cristin has also advised hedge fund managers looking to establish insurance vehicles in Guernsey to enable investors to gain exposure to insurance risk.

Alternative risk transfer solutions are not unique to the general insurance sector. Bedell Cristin has also advised on an unusual life insurance product, the longevity bond. A longevity bond is designed to provide protection to pension funds against the risk that the members/beneficiaries of the fund will live longer than mortality rates would predict thus increasing the liabilities owed by the fund. The structure generally involves the establishment of a special-purpose vehicle (SPV) which issues a bond to the pension fund. Payments under the bond are linked to the mortality rates of the members of the fund. If the members live longer than anticipated the SPV makes a payment to the fund under the bond. The pension fund's potential exposure is therefore hedged by the bond.

There is a natural human resistance to change but Guernsey's willingness to listen to the needs of its business community and react in a timely fashion will, it is hoped, ensure that it retains its edge in the competitive world of offshore insurance and will continue to see growth in both traditional and non-traditional products.